Featured Indicator: Kauffman Index of Startup Activity

We as a country love entrepreneurship. We write books about it, we film movies about the people who change the world with it, and more than anything, we study it. And while business startups have suffered in the post-Great Recession era (where business startup activity has only begun to rise above 40-year lows due to higher credit constraints and tepid entrepreneurial confidence), we still believe that there is plenty of potential in the future of American business development.

Since 1997, The Kauffman Foundation has charted the health of entrepreneurial activity in the United States using the Kauffman Index of Startup Activity (KISA), which tracks the organic growth of new startups (businesses started within the last year) in various states, regions, and metropolitan areas. Currently the KISA for the entire United States sits at 0.37, up 0.69 points from 2015 and 1.29 points from its record low of -0.92 in 2014. While US entrepreneurs aren’t out of the woods yet, they are making a steady and sure return to form.

In this Featured Indicator Article, we will be taking a brief look at how state KISA rankings have evolved over the last three years. We will identify where startups are thriving now, and the big movers in the rankings between 2014 and now. Note that for 2016, The Kauffman Foundation began separating US rankings into larger and smaller states. In order to accurately and consistently measure these rankings over all three years, we have re-ranked the states based on the previous ranking method.

 

Index Components

The Index is comprised of three main measures of startup activity:

  1. Rate of New Entrepreneurs, measuring the rate of new entrepreneurs who start their own business each month. If 320 out of 100,000 adults start a business in November, then the Rate of New Entrepreneurs for that month is 0.32.
  2. Opportunity Share of New Entrepreneurs, a proxy for the portion of new entrepreneurs who started a new business purely because they saw a new market opportunity. This measure attempts to separate people who want to start a business to take advantage of new opportunities, from those who need to start a business to survive poor economic conditions. Opportunity Share of New Entrepreneurs measures the percent of all new entrepreneurs who were not unemployed, including workers and students.
  3. Startup Density, a measure of the number of startups normalized by the population of the selected area.

These measures together are normalized on a comparative scale and then summed together to create the KISA. The KISAs for multiple states can be then compared. For this article, we collected the data published by the Kauffman Foundation between 2014 and 2016. While this only provides three years of available data to draw from, it can be helpful in giving a quick view of where these states are now, and where they may be headed in the coming years. To draw our conclusions, we examined state rankings ordered by KISA from 2014 to 2016, and how these rankings have changed. This gives us a clearer picture of how each state’s startup community has performed relative to its peers.

The data and rankings are prepared by the Kauffman Foundation, and are downloadable on their website. 2016 rankings discern between small and large states, however for this analysis we are ranking all states as a homogenous group.

 

 

Overall Best States for Startup Activity

The five overall best states in the US for startup activity are those that currently hold the highest KISAs in the nation. They are:

  • Montana
  • Nevada
  • Wyoming
  • Oklahoma
  • Texas

Montana remains the most startup-active state in the union, having held its title as #1 for the past three years. Though its aggregate index value fell between 2015 and 2016 (from 4.77 to 2.69), its index was strong enough to remain far higher than any other state. Nevada and Wyoming have followed Montana only recently, having seen meteoric jumps in rankings over the past few years. Between 2014 and 2016 alone, Nevada and Oklahoma jumped in rankings from 21st to 2nd and 31st to 4th, respectively. These jumps in rankings have placed Nevada close behind Montana, with an index of 2.28. Texas saw similar gains in 2016 (jumping from 17 to 5), but was hampered by poor results in 2015 that resulted in it losing four places in the rankings. Every state in this category save for Montana was bolstered by higher Rates of New Entrepreneurs over the observed period.

It is interesting to note that all of these states are geographically located in a cluster on the western half of the United States (shared between the West, Midwest, and Southwest Regions), and are almost all landlocked. These supposed superstars of startup states stand at odds with the traditional perception of coastal tech cities that one might imagine when thinking “startup”.

 

Rising Stars in the Startup Scene

Rising Star states remain ranked in the middle of the pack, but have shown significant progress in improving their KISAs in the last three years and are certainly worth keeping an eye on in the coming years. They are:

  • New Jersey
  • South Carolina
  • Michigan
  • Georgia
  • North Carolina

All states listed have seen continuous positive change in ranking and an average yearly increase in rank of at least 5 places, indicating strong improvement relative to their peers. New Jersey has so far shown the most progress of any state in the US, having rocketed a whole 27 places from 43rd to 16th between 2014 and 2016. Between 2015 and 2016 alone, New Jersey’s KISA grew from -1.54 to 0.25, showing that while New Jersey still has a way to go to improve its startup ecosystem it still shows substantial promise.

Both North Carolina and South Carolina follow New Jersey as Rising Star states, thanks to two years of consistent startup growth. The two states saw modest increases in their KISAs, enough to provide them with significant bumps in KISA ranking. Michigan and Georgia, on the other hand, were boosted by year-over-year index increases of around 1, which heavily boosted their rankings from 2015 to 2016. Both were ranked 41st and 42nd before making a 16-place jump in two years to 25th and 26th, respectively.

These high jumps for all Rising Star states can in large part be attributed to major leaps in both the Opportunity Share of New Entrepreneurs and the Rate of New Entrepreneurs. New Jersey has seen the highest growth of all 50 states in both variables, due in part to its advantageous location between startup hubs in Philadelphia and New York City.

 

Entrepreneurship's Fallen Angels

Fallen Angel states were once in a somewhat strong position to foster strong startup activity within their borders, but have since suffered and stagnated for various reasons that are reflected in their KISA rankings. They are:

  • Maine
  • Kentucky
  • Connecticut
  • Delaware
  • Louisiana

All states in this list classified as Fallen Angels have seen continuous negative changes to their ranking, with average yearly ranking changes of 5.5 places or more. Maine saw the most significant decline, dropping 22 places in just two years. It appears that a strong reduction in Startup Density coupled with heavy decline in Opportunity Share of New Entrepreneurs resulted in a 0.91-point decline in Maine’s KISA between 2015 and 2016, which was more than enough to push it down 14 places in the rankings. Louisiana, Maine, and Delaware follow similar trends though to a lesser extent, with additional losses to the Rate of New Entrepreneurs. Kentucky is unique in having a strong growth in the Opportunity Share of New Entrepreneurs.

Vermont receives an honorable mention on this list, as I have chosen not to include it due to the uniqueness of its current situation. The Green Mountain State witnessed a remarkable 19-place slide in ranks between 2015 and 2016, despite showing strong improvements between 2014 and 2015. This would place Vermont in a slightly worse position than Louisiana, which saw an average yearly decline of -5.5 places per year versus Vermont’s -6 places per year. However, while the states listed in this section showed continuous stagnation or decline, Vermont witnessed a year of strong growth followed by a massive drop in its KISA rank from which it could not recover. Though this precipitous fall may be a one-year abnormality, it does not set the stage well going into 2017.

Use in Economic Development

It would be an understatement to say that entrepreneurs are a major driving force behind economic development. Every new development undertaking is only made reality through the planning, resources, and guts that entrepreneurs put into new projects. Business startups guarantee either the development of new economic opportunities, or the revitalization of old ones. Understanding the components, history, and trends behind the Kauffman Index of Startup Activity can allow economic development researchers to understand where new businesses tend to flourish, and the conditions that allow them to do so. Understanding what promotes entrepreneurship in places like Montana and Nevada (and applying to that a knowledge of what allows new startups to operate beyond their first year) is essential to replicating the success of these states elsewhere.

 

Credit to Made By Oliver and Flaticon for use of icons for the above graphics.

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